The Impact of Employer Payments for Health Insurance and Social Security on the Premium for Education and Earnings Inequality

By Little, Jane Sneddon | New England Economic Review, May-June 1995 | Go to article overview

The Impact of Employer Payments for Health Insurance and Social Security on the Premium for Education and Earnings Inequality


Little, Jane Sneddon, New England Economic Review


The trend toward increased wage and income inequality that emerged in the 1980s - with "the rich getting richer and the poor poorer" - has attracted a great deal of attention and concern. Journalists have brought the growing gap between workers on the top and bottom rungs of the earnings ladder to the public's attention,(1) while academics have sought the reasons for the change. One aspect of this phenomenon has been the growing premium for education, with the disparity between the wage and salary earnings of the least and best educated rising since 1979. Explanations generally focus on the slowing growth in the supply of college-trained workers entering the labor force as the baby boom generation has matured and, on the demand side, the widespread adoption of new technologies requiring skilled workers. However, many economists find that these explanations are not fully satisfactory. A related observation, also not fully understood, involves the increased earnings inequality among similar workers - young, male, high school graduates working full-time, year-round, for example. This rising within-group inequality occurred in the 1970s as well as the 1980s, unlike the increased between-group inequality seen only in the 1980s.

This exploratory article seeks to broaden the discussion by asking whether the rising cost of another element of compensation - employer-provided health insurance and employer payments for FICA taxes - has contributed to the growth in observed and actual inequality among workers over this period. The cost of these two benefits increased from 11 percent of total compensation in 1970 to 17 percent in 1990.(2) Because the cost of these fringe benefits looms large in comparison to the lowest wages, these employer obligations would be expected to take a relatively large bite out of the wages of workers on the bottom rung.(3) Since workers with few years of work experience or schooling also tend to earn low wages, this country's job-based system for financing health insurance and Social Security may have exaggerated the premium for education (and the growth in that premium) found when compensation is measured by wages alone. The rising cost of these benefits might also help to explain the observed increase in within-group inequality for groups defined in a variety of ways, including at the industry or plant level.

On the other hand, the share of the population covered by employer-provided health insurance has shrunk over this period as health insurance costs have soared and as the structure of employment has shifted from manufacturing, mining, and transportation (where health insurance benefits are common) to services (where they are less so). It seems quite likely, moreover, that the declining availability of employer-provided health insurance may have hit less-skilled workers particularly hard. If so, measures of the growth in between-group and within-group inequality based on wage trends would understate the real growth in compensation inequities.

Although several studies have explored the impact of including health insurance benefits and worker payments for FICA on family or household income inequality,(4) discussions of the premium for education are generally based on relative wages rather than on the theoretically preferable concept of total compensation. Compensation is the preferred measure because that total is the value set by supply and demand conditions. If some component of total compensation - employer payments for health insurance, for example - rises as a share of the total, then, other things equal, real wages or other fringe benefits should fall. For this reason, using wage behavior as an indicator of changing supply and demand conditions could be misleading. Moreover, in addition to signaling imbalances in the supply of and demand for specific types of labor, an index of inequality can also serve as a gauge of economic or social equity. From this second perspective too, adding the value of health insurance and Social Security benefits to wages results in a better measure of inequalities in all forms of remuneration than wages alone. …

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